Three major "reflexivity" clouds shroud the market

Author: Wall Street Insights

The current global market is facing a triple mutually reinforcing reflexive cycle: oil price politics, massive capital expenditures by cloud giants, and AI debt risks. Goldman Sachs warns that the negative feedback mechanism formed by the combination of these three factors places the current market in a fragile and dangerous balance.

This week, Rich Privorotsky, head of 1-Delta trading at Goldman Sachs, pointed out in the latest client report that the dual pressure of soaring oil prices and rising interest rates is making it increasingly difficult for the market to digest, and the negative shock on the bond side has sharply worsened.

He stated, if there is no substantial political easing, the market will have to digest the risks on its own, pushing the situation towards a worse direction.

Meanwhile, the uncontrolled expansion of capital expenditures by tech giants and the plummeting prices of bonds related to AI infrastructure are shaking investors' confidence in the narrative surrounding massive cloud companies.

Privorotsky warned that betting on the essence of these companies is evolving into a high-risk gamble on "the revenue inflection point arriving before the peak in expenditures."

Oil Prices---Politics---Inflation: The First Reflexive Cycle

The bidirectional feedback mechanism between oil prices and politics is the first reflexive chain that Privorotsky is most concerned about.

This week, Brent crude oil prices briefly surpassed $100 per barrel, testing market expectations surrounding Trump's policy responses.

Previously, the market generally expected that once oil prices broke a certain threshold, pushing up gasoline prices and dragging down presidential approval ratings, the Trump administration would intervene to suppress oil prices.

This expectation has somewhat supported the resilience of the stock market, but Privorotsky pointed out that with each passing day, as policy responses are delayed at the same price level, the market increasingly needs to drive the results itself.

Interest rate shocks are becoming the most difficult variable to ignore in this cycle.

At the same time, the transmission of energy costs to food inflation is about to become a reality.

Warning signals from the real economy have already appeared—despite American Airlines achieving record high revenues, rising ticket prices, and stable demand, it has still lowered its 2026 performance guidance due to fuel costs having accumulated an increase of about $1.6 billion since early July.

Geopolitical tensions continue to escalate.

According to CCTV News, on July 24 local time, U.S. President Trump discussed the "exit strategy" from the war with Iran at the White House, stating that the U.S. has two options: one is to continue current military actions and possibly intensify strikes to gradually destroy Iran's military capabilities; the other is to reach an agreement through negotiations.

Wall Street Insights mentioned that earlier that day, Reuters cited sources reporting that Pakistan is exploring ways to revive the stalled U.S.-Iran negotiations.

Israeli Prime Minister Netanyahu will meet with Trump at the White House next Tuesday, and Privorotsky hinted that this timing may be brewing a "TACO moment" for the market—meaning a sudden negotiation or compromise scenario.

Capital Expenditures of Massive Cloud Companies: The Second Reflexive Cycle

The second reflexive cycle revolves around the capital expenditures of massive tech companies, with the core contradiction being whether the market is still willing to view substantial investments as costless growth signals.

Google has become a negative symbol in this round of tech earnings season. The company announced it would raise its 2026 capital expenditure guidance to between $195 billion and $205 billion, with free cash flow for the quarter being negative $5.9 billion, leading to a 6.9% drop in its stock price.

While operational data such as an 82% growth in cloud business is impressive, the market is no longer willing to view expenditures as strategic investments without costs, and inquiries about the product roadmap and return on investment have received almost no positive responses.

The more profound impact lies in competitive transmission. If Google increases its spending, it will force its peers to follow suit, putting pressure on the entire massive cloud computing sector. The hardware side is also in distress:

• STMicroelectronics' core profits fell short of expectations, and its third-quarter revenue guidance appeared somewhat weak, with a stock price drop of about 14%;
• Texas Instruments (TXN) performed relatively well, but still closed down 3%.

In terms of the AI competitive landscape, Privorotsky noted that the gap between closed-source models and Chinese open-source models has significantly narrowed.

He stated that the gap previously measured in nine to twelve months has now compressed to a matter of weeks in some benchmark tests. The cost and marginal returns of pre-training compared to reinforcement learning and post-training are giving rise to entirely different economic models; the intensity of competition at the application layer and the flatness of the competitive landscape are historically rare.

He believes that the risks brought by small models and efficiency improvements are still "a story for later," but should not be underestimated.

AI Infrastructure Debt: The Third Reflexive Cycle

The third reflexive cycle is hidden within the bond and financing structures of massive tech companies.

Privorotsky views the bond market as the current most noteworthy risk signal.

Taking Meta's "Hyperion" financing through Beignet SPV as an example, this $27.3 billion bond was initially priced at par but traded above 109 at one point, and has now fallen back to around 95.

Although the overall financial condition of massive cloud companies remains robust, with low leverage ratios on their balance sheets, the repricing of valuations has significantly pressured stock multiples.

The more severe issue is that as capital expenditures accelerate, the conversion rate of free cash flow continues to deteriorate, and the leveraged entities providing financing for infrastructure construction will be hit even harder.

Privorotsky warns that today's capacity expansion could evolve into tomorrow's excess computing power, at which point larger depreciation expenses will begin to wash through the income statement.

Outlook: Microsoft Earnings and Changxin Storage Listing as Key Catalysts

Looking ahead, Privorotsky identified two major events that will serve as important tests for the aforementioned reflexive themes.

The first is Microsoft's earnings call this Wednesday. He believes, "If the reflexive themes are to play out, this may be the most critical call."

The market will closely examine Microsoft's balance between capital expenditures, cloud growth, and free cash flow to determine whether the narrative surrounding massive tech can stabilize.

The second is the listing of Chinese memory chip company Changxin Storage on the Sci-Tech Innovation Board. Changxin Storage is currently the world's fourth-largest DRAM producer, and this fundraising effort is approximately $8.6 billion.

Privorotsky emphasized, "This is by no means an inconsequential new competitor," and if its stock price trades close to the implied valuation levels of the over-the-counter perpetual market after listing, it will have a significant impact on the entire memory chip sector.

Privorotsky concluded with a succinct statement about the current situation:

It feels a bit like a circular reference on the oil price issue.

In a reflexivity-driven market, every variable is both a cause and an effect.